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Okun’s law over the business cycle: was the great recession all that different?

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  • Owyang, Michael T.
  • Sekhposyan, Tatevik

Abstract

In 1962, Arthur Okun posited an empirical relationship between the change in the unemployment rate and real output growth. Since then, the media, policymakers, pundits, and intermediate macro students have used the so-called Okun’s law as a rule of thumb to relate changes in unemployment to changes in output growth. However, some studies have suggested that the relationship has not been stable over time. Furthermore, the slow recovery of U.S. unemployment relative to output after the Great Recession has led some to question whether Okun’s law has changed permanently. In this light, the authors reconsider the evidence on instability in Okun’s law and, in particular, examine whether the Great Recession has contributed to the breakdown of the empirical relationship.

Suggested Citation

  • Owyang, Michael T. & Sekhposyan, Tatevik, 2012. "Okun’s law over the business cycle: was the great recession all that different?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 399-418.
  • Handle: RePEc:fip:fedlrv:y:2012:i:september:p:399-418:n:v.94no.5
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    References listed on IDEAS

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    1. Christiano, Lawrence & Trabandt, Mathias & Walentin, Karl, 2010. "Involuntary unemployment and the business cycle," Working Paper Series 1202, European Central Bank.
    2. Clifford L. F. Attfield & Brian Silverstone, 1997. "Okun's Coefficient: A Comment," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 326-329, May.
    3. Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
    4. Mary C. Daly & Bart Hobijn, 2010. "Okun’s law and the unemployment surprise of 2009," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar8.
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